BIS Expands the Huawei Foreign Direct Product Rule to Capture a Wide Swath of COTS Products

Arent Fox
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Arent Fox

On August 17, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) issued a final rule (the Final Rule) (1) adding additional Huawei non-US affiliates to the Entity List, (2) confirming the expiration of the Temporary General License (TGL), and (3) amending the so-called Foreign Direct Product Rule (FDPR).

BIS also issued another final rule clarifying that prohibitions on Entity List entities apply regardless of the role the entity plays in the transaction.

1. Addition of Entities to the Entity List

BIS’s Final Rule added 38 additional non-US affiliates of Huawei to the Entity List because, like the other 115 Huawei entities on the Entity List, they pose “a significant risk of involvement in activities contrary to the national security or foreign policy interests of the United States.” The additional 38 entities are in 21 countries, and entities located in China’s Hong Kong Special Administration Region are listed under the Entity List heading for China.

As with most other entity listings, the export restrictions are high: a license is required for the export, re-export, or transfer (in-country) of any item subject to the EAR, including EAR99 items, and there is a presumption of denial for license applications. The newly listed entities are also subject to the new Foreign Direct Product Rule discussed in 3 below.

A narrow carve-out exists for the release of EAR99 technology or technology controlled for antiterrorism (AT) reasons only when released to members of a standards organization for the purpose of contributing to the revision or development of a standard.

As clarified in the second final rule issued on August 17, 2020, BIS considers the Entity List restrictions to apply regardless of the role of the Huawei entity in an export transaction. As such, exports, reexports, and transfers (in-country) are prohibited without a license if a Huawei entity is the purchaser, intermediate or ultimate consignee, or end-user.

2. Removal of Temporary General License

The Final Rule allows the TGL that had been in place for Huawei and its non-US affiliates to expire. The TGL was initially put into place days after Huawei’s original designation on the Entity List back in May 2019, and originally permitted limited transactions with Huawei to support continued operations of networks and equipment, support to existing handsets, cybersecurity research and vulnerability disclosure, and engagements as necessary for the development of 5G standards by a duly recognized standards body. Over the last year, the TGL has been extended and narrowed but is now no longer available.

In place of the TGL is “a more limited permanent authorization that will further protect US national security and foreign policy interests,” related only to cybersecurity research and vulnerability disclosure. In March 2020, BIS asked the public for comments regarding the expiration of the TGL, and this limited authorization is the result. To effect this change, BIS amended the license requirements for designated Huawei entities in the Entity List itself, inserting a footnote that is based on the TGL permitting the export, re-export, or transfer (in-country) of items subject to the EAR if the disclosure to the designated Huawei entity(ies) is limited to “information regarding security vulnerabilities in items owned, possessed, or controlled by Huawei or any of its non-US affiliates when related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently ‘fully operational network’ and equipment.”

Two of the original authorizations from the TGL are no longer available (continued operation of existing networks and equipment and support to existing handsets) and the authorization related to standards organization has been formalized in an interim final rule from BIS.

3. Foreign Direct Product Rule

As we previously reported, effective May 15, 2020, BIS changed General Prohibition Three, also known as the FDPR, to further limit technology releases to designated Huawei entities, primarily targeted on the semiconductor industry. Specifically, the May 15 rule made the following products subject to the EAR: products designed or produced by a designated Huawei entity, or products of Huawei software or technology if the products were also the direct product of technology or software that was subject to the EAR and fell into a subset of ECCNs (or was the direct product of a plant or a major component of a plant that was the direct product of US- origin “technology” or “software” that falls into a list of specific ECCNs). The ultimate impact of that rule was to require exporters (as well as non-US re-exporters) to be able to identify any Huawei designed or produced products or technology they were supplying to Huawei.

This Final Rule substantially expands the scope of what the FDPR captures for Huawei and other Entity List entities with a footnote 1 restriction. The revised FDPR removes the requirement that the foreign product in question has to be either developed or produced by a designated Huawei entity or be the direct product of Huawei software or technology. Instead, to be captured under the new FDPR, the party exporting, re-exporting or transferring the foreign product only needs to have knowledge that either:

  1. The foreign-produced item will be incorporated into, or will be used in the “production” or “development” of any “part,” “component,” or “equipment” produced, purchased, or ordered by any [Huawei entity on the Entity List] in the license requirement column of this supplement; or
  2. [A Huawei entity on the Entity List] is a party to any transaction involving the foreign-produced item, e.g., as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user.”

In other words, the FDPR has gone from covering only products developed or produced by Huawei or that are the direct product of Huawei’s software or technology – essentially Huawei designed or developed products – to capturing all commercial off the shelf (COTS) products that: 1) just happen to be going into something that eventually will be ordered or purchased by Huawei – regardless of whether Huawei takes delivery of the item; or 2) are part of a transaction to which Huawei is otherwise a party.

The FDPR items still need to be the direct product of US-origin technology or software that fall into the enumerated ECCNs, or the direct product of a plant where a major component of the plant is the direct product of one of the enumerated ECCNs. Thus, they still need to be either:

  1. The direct product of “technology” or “software” subject to the EAR and specified in Export Control Classification Number (ECCN) 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991 of the Commerce Control List (CCL); or
  2. Produced by any plant or major component of a plant that is located outside the United States, when the plant or major component of a plant, whether made in the US or a foreign country, itself is a direct product of US-origin “technology” or “software” subject to the EAR that is specified in ECCN 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991 of the CCL.

But critically they no longer have to be designed or produced by Huawei. So COTS products that are the direct product of US-origin software or technology that fall into the enumerated ECCNs above, or the direct product of a plant where a major component of the plant is the direct product of one of the enumerated ECCNs, now need a license for export, re-export or transfer, if the company engaging in the transaction has a reason to know that Huawei will order or purchase a downstream product containing those items or is otherwise a party to the transaction.

Unlike most license applications related to designated Huawei entities, BIS will consider licenses on a case-by-case basis if the sophistication and capabilities of the technology fall below the 5G level.

4. Parts of the Rule Go Into Effect Immediately

The Final Rule includes two savings clauses: one for the added entities and removal of the TGL, and for the FDPR change relating to the foreign direct product (FDP) of the technology/software ECCNs, and one for the FDPR change related to the FDP of plants and major components of plants.

For New Entities, TGL Removal, and the FDPR relating to the FDP of the technology/software ECCNs: The rule is effective nearly immediately. Exports or reexports that were already en route on the date the Final Rule was filed for public inspection, which we understand to be August 17, 2020, may proceed.

For the FDP of plants and major components of plants: Shipments of foreign-produced items that are the direct product of plants or major components of plants that have started production on August 17, 2020, can proceed provided they are exported from abroad, re-exported, or transferred (in-country) before midnight (local time) on September 14, 2020.

5. Conclusion

As the Huawei and telecom drama continues to unfold, it is clear the US Government is now on a fast track to revise its export control and related laws to respond to perceived national security threats posed by China, as well as Huawei and its affiliates in particular. Exporters, particularly in the semiconductor industry but also downstream industries, are advised to continue to maintain a robust export compliance program, and be prepared to make changes on little to no notice.

Ultimately BIS and the US Government keep sending the same message: if you are legally selling to Huawei, the US Government will revise its regulations to ensure that you are no longer legally selling to Huawei.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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